Wikipedia defines investing as investment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. An asset is usually purchased, or equivalently a deposit is made in a bank, in hopes of getting a future return or interest from it. The word originates in the Latin "vestis", meaning garment, and refers to the act of putting things (money or other claims to resources) into others' pockets. 

While Trading is defined as In finance, a trader is someone who buys and sells financial instruments such as stocks, bonds and derivatives. Traders are professionals, casual investors or speculators in financial instruments traded in the stock markets, derivatives markets and commodity markets, comprising the stock exchanges, derivatives exchanges and the commodities exchanges.

Several categories and designations for diverse kinds of traders are found in finance, these may include:

    * stock trader

    * day trader

    * floor trader

    * paper trading

Typically, investing is done with long term goals in mind while trading is done with short term goals in mind.  You wouldn't for instance trade using your retirement account, though you would review your holdings in that account on a regular basis and review your assets to see whether other investment options might be right for your account.  Stocks, bonds and mutual funds make up the investment portfolio in investment accounts.

Traders will generally have very short 'windows' that they might consider trading whether they are purchasing or selling.  Typically, stocks, derivatives and options make up the typical portfolio of a trader.  Bonds and mutual funds are not typically suitable instruments for short term sales due to the trading charges that are associated with them.

Where and investor will look for longer term yields, growth potential and stability of an asset, a trader is going to look for immediate yields, income potential and volatility.  Because of the potential losses that are normally associated with trading (especially day trading) it is not a suitable investment program for most of us to consider when we are looking at portfolios that are intended for long term goals such as additional retirement income, college planning, etc.

Trading involves buying and selling securities on a regular basis to catch movements in the stock market (wit ah goal of short term profits).  This could be as often as several times a day, a week or a month.  Investing involves buying and selling securities with the expectations of longer term gains.

Normally people who are investing depend on advice from a stock broker, money manager or mutual fund manager.  A trader on the other hand depends on only themselves for deciding what to trade and when.  The goal of an investor is to benefit from long term gains in the underlying asset as well as the income that may be derived from that asset over time, while the goal of a trader is to benefit from short term market fluctuations.

In many cases, a trader derives their livelihood from the trading that they do, often not holding another full time job - while an investor goes on with their 'normal' lives and their portfolio is something that needs to be dealt with on a regular basis but not something that consumes their time on a daily basis.

The stock market is a suitable arena whether you are intending to be a long term investor or a short term trader.  Often, there are other investment opportunities which you will want to take on long term, but just as often you will find appropriate trades that you can do on the short term.

Options' trading is typically not considered to be appropriate for longer term investors.  Options generally expire within 90 days of purchase, making them far more suitable investments for short term (or even day long) trading.  Options' trading is inherently risky and therefore should never be considered for a long term investment.  LEAPS have become the exception to this and we will discuss them further in our client education series.

Bonds are never suitable trading instruments.  A bond has a maturity date and often selling a bond prior to that maturity will result in a loss of a part of your investment. Bonds are suitable vehicles for longer term investors who are seeking to protect their capital while collecting interest on that capital.

Whichever investment vehicle you've selected, you will want to build your trade plan around that investment (or group of investments).  If you are considering a variety of investments, you will want to identify each of them in your trade plan and identify what your goals are for each of them, how much you want to invest in each and what you are looking for in terms of growth.  The best trade plan that you can set up for yourself is one that combines a combination of long and short term plans for investing and trading.

To understand the value of purchasing an Equity Option, you must first understand what they are.

Equity is defined as the stock of a company, for instance International Business Machines (IBM).  An option is simply a contract that allows you (but does not obligate you) to purchase or sell shares of the equity for a set price during a fixed period of time, at a price that is significantly less than purchasing the actual security.

Some of the benefits of purchasing an Option to purchase (or sell) a stock is that it allows you to prepare to purchase stock at a price lower than current market price, protects your holdings in a stock from declining market prices, and can increase your income against stocks that you currently hold in your portfolio.

Let's assume you currently own 500 shares of IBM that you purchased at $89.00 per share and you believe that the stock will increase to the years' record high of $129.00 per share.  You (as the holder of the security) decide that you would like the 'option' of being able to purchase additional shares of IBM at $90.00 per share.  You can purchase a 'call option' for $10.80 (cost would be $10.80 X 100 (number of shares that you can purchase)) allowing you to purchase 100 shares at $90.00 per share, rather than purchasing the stock outright at $90.00 per share, limiting your exposure in the event that the stock price declines (rather than increases).  The converse side of that is that you can purchase a 'put option' to sell shares at $90.00 per share for approximately $2.10 (cost would be 2.10 X 100 (number of shares that you can sell)) thereby guaranteeing that you can 'exercise' the option to sell those shares should the market decline.

Depending on your market outlook and exposure, you can protect your investment or increase your investment(s) for a fraction of the cost of purchasing the underlying security outright at the current market price.

To learn more about Equity Options, visit our website at http://www.accendotraders.com

Capitalization of Indexes

Capitalization Weighted:

An index may be set up so that the capitalization is biased towards the securities that have a larger price.  This method of calculation is known as 'capitalization-weighted'.  The formula for used is the market price for each stock multiplied by the number of outstanding shares.  Typically this allows for greater impact on the value of the index.

Equal Dollar Weighted

This method of calculation gives equal weight to all components of the index.  It is calculated by establishing the total market value for each security and then determining the number of shares.  Then the combined market value is divided by the current market value.

This method of calculation is done by simply adding up the prices of all the securities in the index and diving by the number of securities.  No weight is given to outstanding shares.

Accuracy and Adjustments

From time to time a single security might be dropped from an index due to business events. These might include mergers and liquidations, or perhaps because the stock is no longer considered to be the same as the other types of stocks that make up the index. Sometimes securities are also added to an index.

Adjustments are sometimes made because of this type of substitution of underlying securities or because a new stock is issued.  Such changes are left up to the discretion of the publisher of the index and usually will not cause an adjustment in the term of the outstanding options.

From time to time an adjustment panel will make adjustments to the securities which make up the index, or the method of calculation.   

Typically as long as the securities in the index are being traded, the prices of the securities are being promptly reported and the market prices reflect price movements, then the index will be accurate.  Any fluctuations in this will cause inaccuracies.

Similarities:

• An option (listed options) are similar in nature to stocks
• Options need a buyer to bid on the option and a seller willing to offer the option for sale
• Options can be bought and sold like a stock
• Options are traded just like stocks

Differences:

• Stocks get their value from the value of the company while options get their value from the 'derivatives' (i.e. they get their value from the stock they are derived from)
• When you purchase stock they do not expire; options have an expiration date
• There are a fixed number of shares of a stock that are available for sale while an option has no fixed number available
• Option holders have no rights with the company (voting rights or the right to dividends) while stock holders have such rights

Investor/Seller

An investor who purchases an option has the right to exercise that option (but not the obligation to do so).  The seller of the option has the obligation to allow the investor to exercise the option.

An investor in a Call option may exercise the right to purchase the stock at the strike price of the option (but has no obligation to do so).

An investor in a Put option may exercise the right to sell the stock at the price of the option (but has no obligation to do so).

The seller of a Call option has the obligation to allow the investor to purchase the stock at the strike price.

The seller of a Put option has the obligation to allow the investor to sell stock at the strike price.

It is important to note that most often, options are not exercised, rather the investor will chose to take profits by open trade of the option before the expiration date.

Options may be used as an alternative to purchasing stocks (since each option is equal to 100 shares of stock) which allows the investor the ability to profit from market moves with lower risk (i.e. lower investment equals lower risk).

Candlestick Charts are said to have been invented by a Japanese rice trader sometime during the 18th century.  Today, Candlestick Charts are the most commonly used forms of display for stock market pricing due to their flexibility (versus bar charts or line charts).

There are multiple forms of candlestick chart patterns here is an overview of just a few of them:

To signal an uptrend in pricing, there would be a 'white candlestick' which may occur in different lengths with the longer body being a more significant price increase.

To signal a downward trend in pricing, there would be a 'black candlestick' which may occur in different lengths and the longer the body the more significant the price decrease.

A bullish pattern in the stock market during a downtrend in overall pricing would produce a long lower wick and a small or bodiless candlestick known as a hammer, while an inverted hammer would signal a possible reversal in a price that has been dropping. 

You can obtain additional information or see what some of the various patterns look like by visiting our website at http://www.accendotraders.com.  There you will find a full description of the variety of candlestick charts that you may become familiar with as you begin trading.